If you convert the ascii value for a letter into binary you'll see all the lower case ones start "011", so "a" is 01100001 and "z" is 01111010, and the upper case with "010" so "A" is 01000001 and "Z" is 01011010.
ASCII - Binary Character Table[
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By "flag" they mean the position of one of the units (which can be 0 or 1). So third flag means the third digit from the left. A flag is anything that can be considered on or off, true or false etc.