I am so sorry about your mother. My mother-in-law has lung cancer that spread to lymph nodes and bones and is not expected to make it even 6 months. I received a lot of helpful advice here at Mamasource.
My oldest daughter is 4 and very close to her MomMom. To "prepare" her, I have told her that MomMom has cancer and will not get better. I told her this only at the point where MomMom can no longer feed herself, drink on her own, is wheelchair bound, and delirious from pain meds much of the time. It may not be worth it to tell your daughter before that time comes, as children have such a different perception of time from ours. Also, if your mother doesn't look any different except for the hair loss, it may only serve to make your daughter paranoid about who else may be terminally ill and not look like it.
My daughter understands death in this way: the person does not eat, does not sleep, does not feel, does not think, does not move. They are buried in the ground where we can visit their grave to honor their memory with pretty flowers. She understands this better because we have lost 2 cats to the road in the last couple of years. We had several discussions about it after reading some children's books about death. The one that she seemed to understand most was called "Waterbugs and Dragonflies". She understands that MomMom won't be around much longer and has been wonderful with her. We visit often and my daughter "takes care" of her, draws her pictures, makes her smile. She understands that everyone is sad that MomMom won't get better and did cry a little that she wanted her to get better. I expect this to come up in converstaion several more times before she dies.
My husband and I have decided that she will be able to go to the viewing, but no the funeral as she likely won't have the maturity to sit through it without being disruptive.
I wish you and your family all the strength you will need to make it through this very tough time. I will pray for your family.
K. E.