This is a personal thing, and no answer is going to be right for everyone.
Personally, I would just explain to her, after the fact, what has happened, and
show her Josie's resting place, and let her  do flowers or some such. Do you
know the Rainbow Bridge story? It might be good for a 2 year old, and something
she can make some sense of. Please accept my condolences on the loss of your
beloved old friend also. It'''s tough to lose them.

Sherry

I would not let her see the dead animal. We lost our cat one month ago and
even my fifteen year old

I would not let the little girl see the dead pet. We lost our cat one month
ago, and even my fifteen year old daughter could not handle it.

Carola

I agree with the others, except that I personally am not sure how close a 2
1/2 year old could be to a cat. Does she really love the cat, and is often
with her, or playing with her, or not? I suppose like Sherry said, tell her
a pleasant story about Rainbow bridge(just run a search on the net, you'll
find a lot about it) where your cat is going to. Don;t let her see the body.
Perhaps tell her that the grave is actually the door to the rainbow bridge,
and living flowers there will mean a lot to your cat. Don;t tell her about
Josie in final statements(she died; You will never see her again etc).
Behave as if Josie is still alive, just gone to a much nicer place, where
she can play with other cats. In fact most of us grown ups believe that , or
want to believe that about our dead pets.

In fact, I think she will be more concerned about the fact that you are
crying and are sad. Perhaps just tell her the truth, that you are missing
Josie, but are happy at the same time that Josie is happy in Heaven.

Please accept my condolances as well. The death of a member of a family is
the worse moment one can go through in his/her life, and I feel for you. If
you want to talk about your pain and feelings, please right in here or in
alt.support.grief.pet-loss. Al the best

Gee, Tiara, Shadow, Tigger and Charlie,
with QT in our hearts