The layers are ordered from the topmost layer to the background layer. The background layer is always listed at the bottom of the palette. A thumbnail of the image is displayed on the left and the name of the layer is displayed on the right. The thumbnail is continuously updated whenever the layer is edited. The active or target layer is highlighted in gray and it's name is displayed in the title bar.
All modifications affect only the active layer and only one layer can be active at a time.
To change the active layer click the layer name in the palette or use the move tool, hold down the command key and click anywhere in the document window, the layer containing the clicked pixels will become the active layer.