In the area outlined the finish looks a little "off"; but the surface isn't scored or flaking. Doesn't look like anything got dragged through the journal.
Follow the FSM for inspections. If it all checks out, reassemble the beastie.
I don't know how experienced you are, so if this advise is...
Looks the same as mine, just different page numbers for different format.
I have a digital copy:
Do you have .0001" micrometers to inspect the cam shaft? You need a set of 1-2's
No. You can't replace the caps, they are line bored as an assembly with the head.
It will be new cams or a new head or both.
You are looking for oil clearance through a gap. If the gap is too much there won't be the proper film of lube to support the cam shaft while spinning.
Theoretically you...
There should a tolerance for the bearing, measured with plasti-gage.
I haven't done one on the cruiser yet but it was easy to do on the Camry.
Just looked, its in the FSM under Engine, Mechanical. For the 96 book it starts on page EM-45.