Can someone explain in more detail how these stones are used to analyse positions? Are "temporary stones" just flagged as such by playing them on the other side, so that it is clear which stones do not belong to the main playing line and can be removed?
If these stones are still popular, there must be some well described way to use them; but all I find in SL is this line "Chinese players like this for analyzing variations by turning the stones in question upside down."
Yes. It is common to see Chinese players analyzing variations by putting the stones upside-down, i.e., the flat side facing up and the rounded side touching the board. The reason is as you stated.