This video shows two ways of creating dropdown lists using data validation. There is one further way to create the list. This is to type out a list in full, such as "Yes, No", in the space where you would normally write "=RangeName" or "=$A$1:$A$10".
A disadvantage to writing the list out in full is that, should you wish to change your list e.g. to "Yes, No, Don't Know", you would have to update all the cells using that dropdown. There is a checkbox marked "Apply these changes to all other cells with the same setting" located just below the box into which you enter the list. If you check this box, it will update all cells that shared the old validation settings.
Data validation can also be used to restrict the entries a user can make in a cell. As well as forcing the user to select from a dropdown, the input can be constrained to numbers, dates, times or text strings of a specific length.
If you are using Excel 2007 or 2010, then the data validation option is towards the right of the Data tab in the Excel ribbon