Hey there!
You can absolutely do a refund right on the order screen. You also have the option for the item to be restocked and this should happen right away. Read more about refunds here: http://docs.shopify.com/manual/your-store/orders/refund-order
When you click on refund, it will initiate the refund right away, but depending on your customers bank, it could take a couple days for the funds to be posted back onto their statement :)
I hope that helps!