How to create a drop down list

You need to have a list of values first

For my example I created a separate sheet with just two cells Yes and No

To force a cell to accept only Yes/No, click the cell, click Data on the toolbar and click Data Validation.
On the pop up, choose List from Allow: and choose the two cells containing 'Yes' and 'No' as Source:
See below screen.

Click ok and you are done, you can apply the drop down to other cells as well by copying and pasting.

Note: In older versions Excel 2003 and below, the source of the list (Cells of Yes/No in this case) must be in the same sheet as the drop down, kind of weird.