Plywood is graded based on the appearance and defects in the veneers. Veneer is divided into the following five grades: N grade is free from defects, knots, and restricted patches and is suitable for work where natural finish is desirable such as cabinet work. A grade is smooth, free of knots, and paintable. N and A are considered the highest grade levels. B grade is similar to A grade except that knots, patches, and sanding defects may be found. C grade allows larger knots and knotholes; it is the lowest grade allowed in exterior-type plywood. C-plugged is a repaired or improved C grade. D grade may have larger knots, knotholes, and a number of repairs, holes, and sanding defects; this grade is not permitted in exterior panels.