"Walk Flags" refers specifically to a Combo property that determines whether or not Link can walk on that Combo. (This property is sometimes referred to as solidity. Solidity and walkability are the opposite of each other, in that if a combo is solid, Link cannot walk on it.) Each 16x16 combo is divided into 8x8 quadrants for the purpose of setting walk flags. For each 8x8 square, you may make that 8x8 area either walkable or unwalkable.
A common bug can arise from the fact that enemies will ignore the top two 8x8 walk flags. If a combo has the bottom two walk flags walkable but the top two not, an enemy on there could still go up depending on the combo above. This is can cause problems, but should be fixed soon (if it isn't already in one of the the current ZC betas).
Setting and viewing solidity
In the ZQuest editor, the solidity of a single combo can be viewed and set by editing the combo. Open combo properties and click anywhere in the blank square on the left. If part of the square is pinkish-orange, then that portion is unwalkable. If it is gray, it is walkable.
(Note: if clicking causes part of the square to become light blue, then you are clicking in the wrong square. That is the CSet2 square, which serves a different purpose.)
While editing a screen in ZQuest, pressing the "W" key will show you the solid/walkable areas of the entire screen.
Combo solidity can be inspected and set in "real time" during a game by using scripting. See the following ZScript functions and methods:
Note that changing the solidity of a combo changes it every where in the game, not just for the single instance of the combo edited or otherwise modified using a script.
Layers and solidity
If you are using layers, the solidity of a particular location on the screen is determined by the "additive" solidity of combos on layers 0 (the main screen), 1, and 2. For instance, if you put a solid combo (say, a rock) on Layer 1, and then put a walkable combo above it on Layer 2, that particular location will remain solid. As another example, if only the left portion of the combo on Layer 1 is solid, and only the right portion of the combo on Layer 2 is solid, then overall that location will be completely solid (all four quadrants will be unwalkable).
Link is able to walk under solid combos placed on Layers 3 and above.