Item's quality affects it usefulness and its value. The following lists all the different names for item qualities.
Default (for items without special names, as below): poor, inferior, decent, fine, perfect
Weapons: crude, rough, decent, fine, masterwork
Arrows: curved, rough, decent, fine, superior
Clothing: crude, rough, decent, fine, masterwork
Containers: leaky, rough, decent, fine, beautiful
Food: awful, bland, decent, tasty, delicious
Fresh animal skin and Fur: ragged, harsh, decent, fine, superior
Carcass and corpse: grisly, mangled, hacked, torn, harmed, decent
(A "decent" quality item will not show its quality in the item name.) The highest grade is worth 1.5 the price of decent. Fine is worth 1.25, rough 0.5. The lowest grade is not accepted for trades.
Crafting and quality
When crafting an item, or cooking, the quality of the product is affected at least by character's skill level, skill modifier of the object being crafted (a bonus or penalty defined in the crafting recipe), and the quality of tools and materials used. Some tasks are also affected by the character's physical penalty or fatigue, while others are not.
The character's base skill level (the one shown in the skills page) required to be able to craft best quality items seems to be 70. For fine items it's 40, and for decent items it's 20. The common skill used to craft many items such as clubs and cords seems to be set to level 60, meaning it's impossible to get the highest quality for items crafted using this skill without modding the diy_glossary.txt file in the game folder.
The user caethan has done a lot of testing concerning crafting quality and posted the results in the forums.