Young children are highly creative, but their creativity is different from an adult's. A child's creativity comes from his undeveloped understanding of how the world works, rather than from a strong drive to make things up from scratch. He may create a story about a cat who can sing -- he knows cats and he knows singing, but he doesn't yet quite grasp the difference between fantasy and reality, so his logical mind doesn't interfere with the fantasy story (as it may when he gets a little older). However, his singing cat is likely to go through the story doing basically normal human activities -- the things the child sees happening around him on a daily basis. He takes real-world elements from his experience and combines them in fantastical ways.
Consider a little girl naming her doll: she is very likely to name her doll after the relative she has seen most recently or the heroine of the last story you read to her. This kind of thought process means that story topics for young children to write are most successful when they don't require the child to invent story elements she has never encountered.
Young children love to tell stories about themselves, their families, the places they go and the things they do. The same holds true for their writing -- a child who is learning to write will usually enjoy writing about himself and the people close to him. Encouraging a child to write about his own experiences helps cultivate a love of writing, because, as anyone who has ever had a child knows, kids love to talk about themselves.
Even when very young, some children are visual learners and some are auditory learners. Visual learners may gravitate to picture books, photographs and drawings over stories they have heard. For some such children, the easiest way to find a story topic is to base it on a picture. Show the child a picture in which something is happening -- a horse is chasing a man, a girl and her dog are playing fetch, a father and son are fishing -- and invite the child to write a story about the picture. Choose pictures with vivid action, where any people or animals have clear facial expressions. This will help train the child to learn supporting story details, such as the characters' emotions, from pictures.
Make use of a young child's tendency to use story elements with which she is familiar by suggesting that she write a story based on one she already knows. Have her write about what happens after a book finishes, or encourage her to find parallels in her own life and write about those. If your child likes "The Very Hungry Caterpillar," suggest that she write about what the butterfly eats on its first day out of the cocoon or about what she would eat if she were very, very hungry.