1. David has done foolish things in the past, but I never thought he would do anything this foolish. This really takes the cake.
2. They have always used poor judgment when it comes to social affairs, but this outdoes anything they have done in the past. This time, their behavior takes the cake.

The expression is often used to express one’s shock at impolite or bad behavior. The shocking behavior is usually something that surpasses some previous bad behavior. It is usually used in the present simple tense and infrequently in the past tense.