Translation:Here is a small cat. Its home is the café.
I didn't think that was the question. I understood it to be whether ĝi always has to be translated as "it". I would say not. Use your common sense. Personally, though, I would never refer to a cat of unknown sex as "they", so I would say "it" here.
And always remember that you're being checked by a machine. Within the course "it" is always the safest bet.
At some point in my life, I had trouble remembering this. Like you, it felt logical to me that if apostrophe-s is possessive, you should use it with possessive "its", but that's not true.
Think of it like "his" and "hers" - possessive pronouns don't use apostrophe-s. We don't say hi's and her's.